Powering Up Your Income

For drawing income from non-RRSP/RRIF and TFSA plans the tax treatment of different types of income can make a big difference in how much you get to keep after taxes. That in turn can greatly extend how long that income can last:

• Interest Income is the least efficient, it’s 100% taxable and taxed annually whether you’ve received it or not.

• Dividend income has a dividend tax credit that more than offsets the “dividend gross up” and therefore offers a lower taxation amount than interest.

• Only 50% of Capital Gains are taxed and that only occurs once an investment asset is sold so you have the lowest tax rate + flexibility to plan when a capital gain is triggered

• A special less known option for income is Return Of Capital* or Tax Class investment funds. This (ROC*) type of investment fund deems a portion of the distributions paid to investors as a return of capital rather than income earned from the fund's investments. The result is a pool of what can be traditional income assets that can offer the best of all worlds, cut taxes dramatically, and greatly improve the length of income sustainability.

For a closer look, check out Fidelity’s Tax-Smart Income resources.